How a phony tweet and computer trades sank stocks

In this, Wednesday, Feb. 27, 2013, photo, employees load a washer and dryer into customer's car at the loading docks of Nebraska Furniture Mart in Omaha, Neb. The Commerce Department reports on business orders for durable goods in March on Wednesday, April 24, 2013. (AP Photo/Nati Harnik)

Trader Christopher Lotito, center, works on the floor of the New York Stock Exchange Wednesday, April 24, 2013. No sooner did a phony Associated Press report of explosions at the White House appear on Twitter on Tuesday than investors started dumping stocks, eventually unloading $134 billion worth. Turns out, some investors are not only gullible, theyre impossibly fast stock traders. (AP Photo/Richard Drew)

For a few surreal minutes, a mere 12 words on Twitter caused the world’s mightiest stock market to tremble.

No sooner did hackers send a false Associated Press tweet reporting explosions at the White House on Tuesday than investors started dumping stocks – eventually unloading $134 billion worth. Turns out, some investors are not only gullible, they’re impossibly fast stock traders.

Except most of the investors weren’t human. They were computers, selling on autopilot beyond the control of humans, like a scene from a sci-fi horror film.

“Before you could blink, it was over,” said Joe Saluzzi, co-founder of Themis Trading and an outspoken critic of high-speed computerized trading. “With people, you wouldn’t have this type of reaction.”

For decades, computers have been sorting through data and news to help investment funds decide whether to buy or sell. But that’s old school. Now “algorithmic” trading programs sift through data, news, even tweets, and execute trades by themselves in fractions of a second, without slowpoke humans getting in the way. More than half of stock trading every day is done this way.

Markets quickly recovered after Tuesday’s plunge. But the incident rattled traders and highlighted the danger of handing control to the machines. It also raised questions about whether regulators should be doing more to monitor the relationship between social media and the markets.

Irene Aldridge, a consultant to hedge funds on algorithmic programs, said glitches and plunges may be inevitable with trading programs that just count the number of positive and negative words, without any filter.

Just how exactly the trading unfolded Tuesday is still a bit of a mystery.

Some experts say the computers took their cue from humans, picking up on a pause in buying as traders read the phony tweet. In Wall Street’s insanely fast trading world, humans holding back for even a second could have signaled to computers that buyers were drying up and that prices could fall, and so the computers should sell fast.

Others, like Saluzzi, think computers may have sold on the tweet itself. That’s possible because computer trading programs are increasingly written to read, and react to, news from social media outlets like Twitter.

Experts say the fake tweet seemed designed to catch a computer’s attention.

Rich Brown, head of Elektron Analytics, a Thomson-Reuters unit that sells news feeds that computers can read, said that the words “explosions” or “Obama” alone wouldn’t have triggered selling. But add “White House,” and it’s a combination even the slowest computer couldn’t miss.

Brown said his service doesn’t include Twitter in its feeds because there’s too much useless “noise” in the deluge of tweets and, given the 140-character limit to tweets, often too little context.

Before the fake tweet appeared Tuesday, it looked like any other good day on Wall Street. Unexpectedly strong earnings reports from Netflix and DuPont sent the Standard and Poor’s 500 stock index up 1 percent at 1,578 with three hours to go in the trading day.

Then, at 1:08 p.m. a tweet appeared on the hacked AP Twitter account stating that two explosions at the White House had injured President Obama. Stocks immediately started falling, and kept tumbling for two minutes. AP quickly announced that its account had been hijacked and the report was false. Prices began to climb again.

A group called the Syrian Electronic Army said it was responsible for the hack. But the claim has not been corroborated. The FBI has opened an investigation into the incident, spokeswoman Jenny Shearer said.

Whoever was responsible, the damage was big. The Dow lost 143 points, or 1 percent, in two minutes. In the frenzied selling, oil prices dropped, gold rose, the dollar rallied and the price of Treasurys, seen by many investors as a hiding spot, shot higher, briefly knocking yields to their lowest level of the year.

Some Wall Street pros were surprised that a single tweet could move markets so much.

Julian Brigden, managing partner of Macro Intelligence 2 Partners, an investment consultancy, said the drop suggested an “unstable” trading environment dominated by investors too quick to buy or sell without any thought.

“To me, it’s indicative of a very dangerous market,” he said.

Though stocks eventually recovered for the day, investors have been on edge recently.

Both the S&P 500 and the Dow Jones industrial average lost 2 percent last week, their biggest weekly drops in five months. Investors were reacting to slowing Chinese economic growth, plunging commodity prices and mixed earnings reports from big U.S. companies. A measure of likely future swings in stocks – what’s known as the “fear” index, or VIX – jumped 40 percent at one point last week.

The Boston Marathon bombing added to the jitters.

“People are looking for a reason to sell, and (Tuesday) it was a fake tweet,” said Adam Sussman, head of research at Tabb Group, a research firm. “Of course, once they realized it was fake, they bought back in, or they stopped selling.”

But he thinks humans played only a minor role in the stock plunge. He said most professional investors are too savvy to sell on a tweet.

“They’d get a tweet from AP and then say, ‘Oh, was there a corroborating tweet from Bloomberg? A corroborating tweet from Thomson Reuters?’ and so forth,” he said. “So I don’t believe that anyone selling substantial money saw that tweet and just began selling off billions of dollars.”

Joe Fox, founder of online brokerage Ditto Trade, said the selling was too fast for humans to have pulled off, and computers were to blame.

“Whoever this jerk (who wrote the tweet) is probably cost some people millions of dollars in a matter of minutes,” he said.